National Blog

What Made the Great Depression "Great"

The Stock Market Crash of 1929 began the long plunge into the Great Depression. Previous economic depressions had usually lasted no more than three years, so why did this one last so long?

Historians often denounce President Herbert Hoover for doing nothing to stop the depression while praising President Franklin D. Roosevelt’s efforts to ultimately end the depression. They are wrong on both counts. The main reason why the depression lasted so long was because of the failed interventionist policies of both Hoover and Roosevelt.

Spending and Tax IncreasesLike politicians today, Presidents Hoover and Roosevelt both approved massive spending increases to stimulate the economy. Taxpayer money was spent on relief, corporate bailouts, and public works projects. This did nothing to stem the economic crisis. It only resulted in a bloated government that sucked capital out of the private sector, where such capital could have been used for innovation, investment, expansion, and job creation.

Barack Obama followed in Roosevelt’s footsteps by criticizing his predecessor while simply accelerating the programs that his predecessor had started. Like Hoover, George W. Bush approved corporate bailouts, and like Roosevelt, Obama approved even more corporate bailouts in the form of "stimulus" and propping up firms such as AIG and General Motors.

Like today, most bailout money went to corporations with the best political connections, not to businesses most in need. Thus inefficiency, corruption, and special interest lobbying ensured that government bailouts had little impact on combating the depression.

In addition, billions of dollars were spent on government-controlled public works projects in the 1930s to make work for the unemployed. But the high cost of these projects and their tendency toward political corruption only made the unemployment problem worse.

The projects only took capital from one sector of the economy and redistributed it to another, which did nothing to stimulate the economy. Government workers were often paid more than workers in the private sector, prompting many to leave their jobs to work for government. Many praised the good intentions of government in trying to create jobs, but government can only create jobs by destroying other jobs, and the other jobs are usually much more useful to communities than government "make work" projects.

Excessive government spending created a deficit that could only be fixed by higher taxes. Consequently, President Hoover approved the largest peacetime tax increase in U.S. history up to that time. Taxes were raised on nearly every individual, business, and product, which only left people with less money to save, invest, or hire workers for their businesses. Taxes were steadily raised even further under Roosevelt.

Wage and Price ControlsPresident Hoover implored business leaders not to cut wages during the crisis because Hoover believed that workers with higher wages would have more purchasing power to stimulate the economy. However, when consumer demand decreases, businesses must either cut wages or workers to stay afloat. If wages are not cut, the result is unemployment. It was no coincidence that unemployment was 25 percent when Hoover left office in 1933.

During Roosevelt’s term, several laws were enacted to protect workers and unions in an effort to curb unemployment. However, these laws gave unions power to demand higher wages at a time when consumer demand did not warrant such increases. A minimum wage law made matters worse because it compelled employers to pay workers more than their production value, as dictated by consumer demand. The result was higher unemployment. Consequently, unemployment was 20 percent in 1938, five years after Roosevelt took office.

Roosevelt also sought to regulate industry through the National Recovery Administration (NRA), which imposed regulations limiting production, fixing prices and wages, allowing collective bargaining for unions, and others. These empowered corporations and big unions at the expense of small business owners who could not afford to comply with such drastic rules. The NRA proved so fascistic that the Supreme Court finally ruled it unconstitutional in 1935.

Interventions in AgricultureAgriculture was in rapid decline even before the Depression. This was mainly because the large demand for farm products during World War I (1914-1918) dropped after the war ended. The decreased demand led to lower prices, lower profits, and bankruptcy. What was needed to correct this was a downsize in farming, not more government regulation. But lobbyists ensured the latter.

President Hoover created the Federal Farm Board (FFB), which was headed by corporate leaders who worked to keep farm products off the market until prices rose while lining their own pockets at the same time. However once prices rose, farmers began producing more, making the overabundance problem even worse. This led to more lobbying, more corruption, and a greater distortion of the agricultural market.

When Roosevelt became president, he merely accelerated Hoover’s program with the Agricultural Adjustment Administration (AAA). The AAA tried raising farm prices by encouraging farmers to produce less, including destroying crops and livestock, in exchange for taxpayer-funded subsidies. Thus farmers were actually paid for not farming at a time when poor, hungry people could not afford higher prices or food shortages.

These disastrous policies set a trend for massive government intrusion into private farming that continued until many subsidies were finally ended in the 1990s.

The Federal Reserve SystemThe role of the Fed in the crash and depression has been understated by most historians. The Fed consistently inflated currency and credit throughout the 1920s. This artificially raised prices and created artificial booms in the real estate and stock markets, much like how the Fed’s low interest policy fueled the housing boom of the 2000s. With every artificial boom comes a real bust, and that bust came in both 1929 and 2008.

In the 1920s, the Fed also sought to offset the negative effects of high tariffs by offering loans to foreign nations to buy U.S. goods. There was little consideration as to how these loans would be repaid. Moreover, the Fed began deflating the currency in 1928, and all the production spurred on by inflation could no longer keep up with the dwindling money supply. Banks became more reluctant to provide loans and businesses had less capital with which to expand.

Thus, businesses began cutting back even before the crash in October 1929. The crash was merely the culmination of the Fed’s manipulation of U.S. finance, banking, and currency. Subsequent deflation after the crash further contracted the money supply, making money even harder to come by and helping to turn a recession into a depression.

The Depression ProlongedIn a free market economy, depressions are often the result of market distortions. The purpose of depressions is to remove the distortions and return the economy to a more level playing field. Prior to 1929, the U.S. government had largely allowed distortions to correct themselves with little intervention, which is why prior depressions had lasted an average of only two or three years.

However, both presidents Hoover and Roosevelt refused to allow the distortions to correct themselves. Ironically, Hoover and Roosevelt (like Bush and Obama today) sought to correct distortions caused mostly by government intervention with even more government intervention. Not only was Hoover not a "do nothing" president during the depression, he actually made things worse with unprecedented interventions. And Roosevelt simply accelerated most of Hoover’s policies and programs, which made matters even worse.

Policies that increased taxes and spending, maintained high wages and prices, limited production, and centralized finance destroyed any chance of a fast, smooth recovery after the crash of 1929. Hoover turned the recession into a depression, and Roosevelt turned a depression into the Great Depression.